Why LinkedIn's value may not be crazy

LinkedIn's value underscores the power of me, and distribution

Since LinkedIn went public last week, most reports have flooded in suggesting the price that LinkedIn is sporting is outrageous. Here's an argument for why LInkedIn's value may not be crazy.

If we consider LinkedIn as just a recruiting company, we’ll see its stock price as ridiculously overvalued. If LinkedIn can successfully exploit its social graph, however, we'll look back and say, "I should have..."

LinkedIn kicks off the week at $8.7 billion, a stunning nine times the valuation of one of the more recent new media company IPOs - Demand Media - and, at 18 times this year's sales, it's a price that suggests it'll grow about four times faster than Google.

While most reports suggest LinkedIn, at a staggering 554 times earnings, is a sign of renewed irrational exuberance, or a Fed-and-monetary-induced bubble asset (as interest rates have remained near zero in the past 30 months), one could argue that LinkedIn's value - on comparative multiples - may not be crazy. When Google went public at $85 per share, or some $25 billion in market cap in 2004, most everyone thought it was expensive at some 25 times revenue. What few saw then was the significant distribution power Google was creating for itself.

In like vein, social networks – if done well – have an inherent distribution model.

The power of what LinkedIn has created is its network of deep interconnections - a powerful distribution channel that while not necessarily justifies, certainly helps to support LinkedIn’s valuation.

To see how the market values distribution, look no further than Demand Media’s recent activity. Demand Media recently went public this year and commanded, at close of its first trading day, a $1.5 billion market cap - the largest market cap for an Internet company since Google's 2004 IPO, and a higher value than the New York Times (NYT). Demand (DMD), which closed its first day of trading above $22, currently trades at $13.60.  

Demand generated $252 million in sales in 2010. LinkedIn generated $243 million.  Demand is worth under $1 billion while LinkedIn is nine times more. One big difference in the two is that LinkedIn has a networked distribution model whereas Demand is more aligned with a traditional media company that strongly relies on distribution partners. 

With some 100 million members in 200 countries, growing at one million members every 10 days, LinkedIn is a viral and infectious community that can spread products and information like the flu.  

And, while no one considers LinkedIn a “media” company because two-thirds of its revenue comes from recruiting services, one could argue that LinkedIn is as much a content producer as a traditional media company. Rather than sell content produced by third parties, however, LinkedIn makes available content produced by and for the community. LinkedIn, is in fact, leveraging the power of “me” - my data, my history, my profile, my relationships.

Back in 2006, I wrote a story "Navel-gazers will be the stars in 2007” - a commentary on how demand for our stories, our opinions, our photos, our history, our connections would be increasingly on the rise. At the time, we didn't have a real "value" on this demand. YouTube's price tag of $1.6 billion, paid by Google, was the only indication that the "me" in media was worth betting on.  

Now we know the value. And, as much as we didn’t know the value then, we still don’t know what the 'true' ongoing value of such a network is today.

That said, LInkedIn is priced as though it's extremely profitable. But that's not the case. And, its powerful interconnected network has yet to be completely leveraged.

An entire business ecosystem could still be built atop it. In many ways, LinkedIn needs a Zynga equivalent. As Zynga leveraged Facebook’s social graph, it helped drive new users to Facebook and hence made it more valuable. Facebook’s time on site and utility increased because of the activity that companies like Zynga brought to it.  This is why Facebook’s 600 million users spent an average of 300 minutes on its site in March, according to comScore. LinkedIn’s time on site was just under 30 minutes in that month.

Leveraging this network may be the key to LinkedIn’s future. Expanding internationally might be one way to expand. But expanding time on site might be even more worthwhile.

So, would I touch the stock up here? Shares are trading down 7% to $87 on Monday morning. I wouldn't rule back further pullback.

(Image source: USAtoday.com)